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15 Mar 2012, 23:50

Here's the thing.

Traditionally, Goldman tends to get self-righteous and downright patronizing about "helping clients" when they were no different than anyone else. That's why it causes a lot of other banks to hate Goldman (not because they were #1, but that they claimed to be #1 because of their so-called "values" and morals/standards to clients - when everyone knew that was BS all along; they were #1 because they were the best at making money, and not because they are any more upstanding human beings than folks at other firms like they think they are). From the perspective of other banks who had to deal with them, Goldman had a rep for being duplicitous (two-faced), patronizing and self-righteous to the extreme (the whole "we are doing God's work" BS that Goldman's Blankfein said to Congress is the kind of attitude you'd find at Goldman - you'd never hear that coming from Morgan Stanley, Citi, BofA or any other bank). That was the case 10-15 years ago when I was in the business, and from what I've heard it hasn't really changed.

That's why if the media were to zero in on Goldman Sachs (as opposed to criticizing Wall Street as a whole), you won't see any other bankers defending them at all, and would probably secretly get extra satisfaction to see them flail and suffer. They may even join in on the fun. I mean, when Lehman, Bear and Merrill went down -- there wasn't that same kind of schadenfreude amongst fellow bankers. There was this sense of "sucks to be them, man" even at the junior levels - as competitive as bankers can be, there is still a sense of fraternal empathy for the misfortune of your fellow bankers. But with Goldman, plenty of banks in the past have been the recipient of their patronizing and duplicitous behavior that they may even egg it on (so long as they don't get egg back in their face).

Anyhow, the kind of shenanigans at Goldman (and frankly at other banks) has been going on for the past 15+ years.

The trend being this: going from an agency (commission-based) business model to a principal (capital gains/trading) model. And it's this very trend that led to the 2008 death of Lehman, Bear, and Merrill - and the near-death of Morgan Stanley, Citi and Goldman).

Easiest way to explain this is with an analogy with real estate: instead of being just the middleman, the agent himself is actually now selling you properties he owns. So there is a HUGE conflict of interest and there's no way you can work in your client's best interest anymore, because you aren't just an agent, but a principal in the deals. And even worse, the real estate agent now makes way more money flipping properties himself than he does helping clients with their own purchases/sales. So with that in mind, they have little incentive to help clients.

In an agency model, when clients win, you win (because you take a cut as fees). In a principal model, you win at the expense of your counterparty (better deal you get for yourself means a lesser deal for the other person).

Basically, banks like Goldman have started to look like hedge funds, with a small client business on the side (and interestingly enough, the majority of post-MBA jobs are in the client business: investment banking).

And like any industry or firm, power goes to the divisions that make the most money. With these banks, the traders have made the most for the firm for the past 10-15 years, and have basically taken over the top positions at these firms, especially at Goldman where they have basically become better at being a hedge fund than being an investment bank. And these traders have built their careers not by helping clients like the traditional M&A and investment banking divisions did, but by playing with house money. These traders never cared about clients.

As for prop trading, derivatives, etc. -- Goldman has been one of the earliest and most aggressive of all banks in getting into this. Again, this was happening before the whole real estate mess, but even going back to the Bankers Trust era in the late 1980s and early 1990s (a lot of the derivatives products were pioneered by those who worked at now defunct Bankers Trust, who were direct descendants from the Drexel and Salmon junk bond days of the 1980s).
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16 Mar 2012, 08:03

Great points Alex. I think investment lines will continue to be blurred, evidence Goldman and others with their own venture capital/hedge fund arms now. The agency model seems to be in the rear view mirror at this point, rightly or wrongly.

There was one line of defense Blankfein had in his testimony awhile back that I found telling. It was the suggestion that Goldman's customers are very sophisticated investors and should be aware of all the complexities (and grey areas) in the market. Basically he said Goldman may have to take many different positions to bring their books to neutral, and some of these hedges may be against customer positions.

These seemed like a can of worms when I first heard it, but there really has not been strong backlash from customers to revert back to a more non-conflicted model. I think Blankfein may have a point: everyone knows what is happening, but no one is angry enough to change the model, and despite its inadequacies, it is the one that free markets seems to favor. Perhaps the discourse will change with a future flameout, but until then, it does not seem to be the priority of the markets.